Tennessee deals offer high quality bonds for risk-averse investors
The Tennessee State School Bond Authority and the state of Tennessee, both highly rated infrequent issuers, will sell about $350 million of new money special and general obligation bonds this week and next month.
The School Bond Authority will take bids for about $200 million of bonds Thursday, in a deal pushed back two days because of this week’s hefty pre-holiday competitive slate.
According to Ipreo’s calendar for Tuesday, the day the authority originally planned to issue its bonds, 54 competitive deals are logged with the largest issues being the Miami-Dade County School District’s $400 million of tax anticipation notes and Ohio’s $300 million of GOs. On Wednesday, there are 26 deals.
On Thursday, the State Bond Authority’s $139.21 million of Series A tax exempt special obligation higher education facilities bonds and $60.24 of Series B taxable obligation bonds are the largest of the 18 deals scheduled.
The deal is expected to be structured as fixed rate Series A serial bonds maturing through 2049. They will be subject to optional redemption on Nov. 1, 2029. The fixed rate taxable Series B bonds will have serial maturities maturing through 2044, and are subject to optional redemption on Nov. 1, 2029.
Bidders can opt to combine some series into term bonds after Nov. 1, 2030. No debt service reserve will be provided.
With advance refundings a thing of the past, the authority will issue all new-money bonds, including a taxable portion to avoid a violation of the private use test and because the spreads between taxable and tax exempt rates are “so thin,” said Sandra Thompson, director of the Office of State and Local Finance.
The tax exempt bond proceeds will boost capital projects at 13 universities, ranging from renovations, parking facilities, classroom, recreation facilities and residence hall upgrades to campus beautification projects. Five projects at East Tennessee State University and the University of Tennessee at Knoxville will benefit from the taxable bond proceeds, including a fine arts building where a management contract for building services will be used.
“I think this is really the first time we just focused on new money issuance specifically because in the past we’ve always seen a refunding component and that has driven most of the sales,” Thompson said. “We just really need to take some projects to long term funding and with tax exempt advance refundings gone we can only do current refundings that have a call date of 90 days or less, and we just don’t have any.”
The last time the School Bond Authority issued bonds was in September 2017.
PFM Financial Advisors is advising the authority. Hawkins Delafield & Wood LLP is bond counsel.
The bonds are rated AA-plus by Fitch Ratings, Aa1 by Moody's Investors Service and AA plus by S&P Global Ratings. All have stable outlooks and all three agencies affirmed their ratings on the authority’s $1.5 billion of outstanding bonds.
According to analysts, the School Bond Authority’s ratings are supported by a statutory intercept program that allows for the diversion of state revenues to universities if they don’t make debt service payments to the bond trustee.
Participating institutions must maintain at least 2 times debt service coverage. “Using this measure alone,” Fitch analyst Karen Krop said, coverage of debt service by fiscal 2018 fees and charges was 9.5 times for the University of Tennessee and 24 times for the Tennessee Board of Regents system, which oversees state universities, community colleges and UT.
S&P said its ratings are also supported by the broad pledge of fees and charges generated by all of Tennessee's publicly supported colleges and universities and some of its community colleges.
The state of Tennessee plans to issue about $150 million of GOs on Sept. 17, in an offering that Thompson described as a plain vanilla deal. The state’s GOs are rated triple-A by all three rating agencies.
Most of the proceeds will fund capital maintenance and improvement projects for state office buildings.
There won’t be a refunding component, and about $28 million will be issued as taxable debt to provide additional financing for East Tennessee University’s fine arts building.
While the state typically issues debt annually as project funding is needed, the last time Tennessee came to market was to issue $190 million of GOs in April 2018.
Thompson said the state has been issuing debt less often, and paying cash for capital needs.